Shared Flashcard Set

Details

Exam #4
Chapters 9 -13
55
Finance
Undergraduate 4
04/27/2012

Additional Finance Flashcards

 


 

Cards

Term
incremental cash flows
Definition
difference a firm's future cash flows with a project and without a project
Term
stand-alone principle
Definition
assumption that evaluation of a project may be based on the project's incremental cash flows
Term
sunk cost
Definition
cost that has already been incurred and cannot be recouped and therefore should not be considered in an investment decision
Term
opportunity cost
Definition
the most valuable alternative that is given up if a particular investment is undertaken
Term
erosion
Definition
cash flows of a new project that come at the expense of a firms existing projects
Term
pro forma financial statements
Definition
financial statements projecting future years' operations
Term
depreciation tax shield
Definition
tax saving that results from the depreciation deduction, calculated as: depreciation X corporate tax rate
Term
Accelerated Cost Recovery System (ACRS)
Definition
Deprecation method under U.S. tax law allowing for the accelerated write-off of property under various classifications
Term
forecasting
Definition
the possibility that errors in projected cash flows will lead to incorrect decisions. Also estimation risk.
Term
scenario analysis
Definition
determination of what happens to NPV estimates when we ask what-if questions
Term
sensitivity analysis
Definition
investigation of what happens to NPV when only one variable is changed
Term
managerial options
Definition
opportunities that managers can exploit if certain things happen in the future. Also known as "real options".
Term
contingency planning
Definition
taking into account the managerial options implicit in a project
Term
strategic options
Definition
options for future related business products of strategies
Term
capital rationing
Definition
the situation that exists if a firm has positive NPV projects but cannot obtain the necessary financing
Term
soft rationing
Definition
the situation that occurs when units in a business are allocated a certain amount of financing for capital budgeting
Term
hard rationing
Definition
the situation that occurs when a business cannot raise financing for a project under any circumstances
Term
risk premium
Definition
the excess return required from an investment in a risky asset over that required from a risk-free investment
Term
variance
Definition
the average squared difference between the actual return and average return
Term
standard deviation
Definition
the positive square root of the variance
Term
normal distribution
Definition
a symmetric, bell-shaped frequency distribution that is completely defined by its average and standard deviation
Term
geometric average return
Definition
the average compound return earned per year over a multiyear period
Term
arithmetic average return
Definition
the return earned in an average year over a multiyear period
Term
efficient capital market
Definition
market in which security prices reflect available information
Term
Efficient Markets Hypothesis (EMH)
Definition
the hypothesis that actual capital markets, such as the NYSE, are efficient
Term
expected return
Definition
return on a risky asset expected in the future
Term
portfolio
Definition
group of assets such as stocks and bonds held by an investor
Term
portfolio weight
Definition
percentage of a portfolio's total value in a particular asset
Term
systematic risk
Definition
a risk that influences a large number of assets. Also called market risk.
Term
unsystematic risk
Definition
a risk that affects at most a small number of assets. Also called unique or asset-specific risk.
Term
principle of diversification
Definition
spreading an investment across a number of assets will eliminate some, but not all, of the risk
Term
systematic risk principle
Definition
the expected return on a risky asset depends only on that asset's systematic risk
Term
beta coefficient
Definition
amount of systematic risk present in a particular risky asset relative to that in an average risky asset
Term
Security Market Line (SML)
Definition
Positively sloped straight line displaying the relationship between expected return and beta
Term
market risk premium
Definition
slope of the SML, the difference between the expected return on a market portfolio and the risk-free rate
Term
Capital Asset Pricing Model (CAPM)
Definition
equation of the SML showing the relationship between expected return and beta
Term
cost of capital
Definition
the minimum required return on a new investment
Term
cost of equity
Definition
the return that equity investors require on their investment in the firm
Term
cost of debt
Definition
the return that lenders require on the firm's debt
Term
Weighted Average Cost of Capital (WACC)
Definition
the weighted average cost of equity and the aftertax cost of debt
Term
pure play approach
Definition
the use of a WACC that is unique to a particular project, based on companies in similar lines of business
Term
homemade leverage
Definition
the use of personal borrowing to change the overall amount of financial leverage to which the individual is exposed
Term
M&M Proposition I
Definition
the value of the firm is independent of its capital structure
Term
M&M Proposition II
Definition
a firm's cost of equity capital is a positive linear function of its capital structure
Term
business risk
Definition
the equity risk that comes from the nature of the firms operating activities.
Term
financial risk
Definition
the equity risk that comes from the financial policy (i.e. capital structure) of the firm
Term
intrest tax shield
Definition
the tax saving attained by a firm from the tax deductibility of interest expense
Term
direct bankruptcy costs
Definition
the costs that are directly associated with bankruptcy, such as legal and administrative expenses
Term
indirect bankruptcy costs
Definition
the costs of avoiding a bankruptcy filing incurred by a financially distressed firm
Term
financial distress costs
Definition
the direct and indirect costs associated with going bankrupt or experiencing financial distress
Term
static theory of capital structure
Definition
theory that a firm borrows up to the point where the tax benefit from an extra dollar in debt is exactly equal to the cost that comes from the increased probability of financial distress
Term
bankruptcy
Definition
a legal proceeding for liquidating or reorganizing a business
Term
liquidation
Definition
termination of the firm as a going concern
Term
reorganization
Definition
financial restructuring of a failing firm to attempt to continue operations as a going concern
Term
Absolute Priority Rule (APR)
Definition
the rule establishing priority of claims in liquidation
Supporting users have an ad free experience!